Green Lights for the Greenback

What a difference a few words make. Just a couple of sentences from Janet Yellen on Friday and suddenly the dollar is hot. The greenback gained more than 200 points against the yen and euro since the start of the week, all due to the following section in Ms. Yellen’s speech …

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal-funds rate has strengthened in recent months.”

That’s all she had to say at Jackson Hole to turn sentiment in the forex market around 180 degrees.

The fact is no financial market in the world has been more skeptical of the Fed than the forex market. Even in the staid fixed income arena, yields have started to inch up as U.S. data and the Fed’s rhetoric started to turn hawkish this month.

But currencies refused to believe the message from the Fed until Ms. Yellen spoke on Friday. Her words were hardly definitive, but coming from such an unrepentant dove as Ms. Yellen — they carried weight — suggesting that the Fed is likely to move on rates sooner rather than later.

The greenback is looking good.

I was always under the impression that the Fed would never dare to hike rates in the middle of a Presidential election campaign, but history proves me wrong. The Fed has moved on monetary policy even during the final month of the election and may do so this year as well, despite the very partisan nature of this year’s battle. Ironically enough, Ms. Clinton’s commanding lead could provide the Fed with the cover to act in September since its policy move is unlikely to have much political impact this season.

For Ms. Yellen, the far greater concern may be the credibility of the Fed itself. With Fed officials delaying the normalization process by more than a year, they have lost a tremendous amount of market trust. That’s especially true in the currency market, which appears to have been operating on the Missouri motto – show me. With U.S. data demonstrating steady growth in both wages and jobs, the Fed is feeling the pressure to act. If they move in September, they could buy themselves another six months and observe the economy without being forced to act again.

No financial market has been more skeptical of the Fed than the forex market.

That’s why this week’s employment number looms so large. A good print of 200K new jobs would provide the Fed with the cover to act now and will relieve the pressure on the Fed for several months to come. Another disappointment, however, will deflate the dollar rally once again and will only fortify the skepticism of the dollar shorts. But for now, it’s all green lights for the greenback.

Happy trading,

Boris Schlossberg

Other Developments of the Day

The latest on the job market continues to impress: According to ADP, private sector hiring stayed strong in August as employers added 177,000 jobs. That’s a bit better than the 175,000 jobs economists had expected. ADP also revised July’s gain UP to 194,000 from the original estimate of 179,000. Economists and investors use ADP’s data to get a feeling for the Labor Department’s job report, which will be released Friday. Estimates are calling for nonfarm payrolls to rise 185,000. If the number is decent enough, it may give the Fed more fodder to potentially raise rates. Keep your eyes peeled.

Looking for a luxury pad? Well, the latest data may give you a buying opportunity. In fact, according to the National Association of Realtors, sales of homes above $1 million fell 4% in July. The culprit: Aggressive pricing, oversupply, and jitters over where the financial markets are headed. “That market was the first to recover after the financial crisis, but it’s run its course,” said Jonathan Miller of Miller Samuel, a real estate appraisal and consulting firm. Prices have dropped in San Francisco and Bellevue, Washington — home to tech workers whose bank accounts are more closely tied to stocks — and the Hamptons, New York’s swankiest collection of neighborhoods.

Don’t look now, but the U.S. consumer may be getting a bump: The consumer confidence index rose to 101.1 in August from a revised 96.7 in July, the Conference Board reported. That’s the best number since September, 2015 AND it surpassed Wall Street expectations of 97. According to Lynn Franco of the board: “Short-term expectations regarding business and employment conditions, as well as personal income prospects, also improved, suggesting the possibility of a moderate pickup in growth in the coming months.” And she may not be too far off: GDP is expected to grow about 3.5% in the third quarter, a big improvement over the second quarter’s measly 1.1%.

The Money and Markets team

Boris Schlossberg is a weekly contributor to CNBC’s Squawk Box and a regular commentator for CNBC Asia and CNBC Europe. His daily currency research is quoted by Reuters, Dow Jones, Bloomberg and Agence France Presse newswires and appears in numerous business publications and newspapers worldwide.
Mr. Schlossberg has written articles on trading for SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is the author of Technical Analysis of the Currency Market and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game, both of which are published by Wiley.
Boris’ extensive experience in trading and developing momentum-based techniques provide the foundation for BKForex’s strategies.

{18 comments }

HowardWednesday, August 31, 2016 at 4:58 pm

Hi Boris

The low level of confidence in the Fed is exacerbated by the perception that they have completely mishandled the situation regarding free markets. It is always easier to lower rates than raise them and the distortions now created from this mismanagement have led to a loss of confidence in monetary policy. In reviewing rate adjustments prior to the election of previous new administrations the only predictable certainty is of a bubble being popped. Fundamental economic growth is only seen when risk takers have the perception of control over outcomes. These manipulated circumstances don’t encourage market risk.

barry stanleyWednesday, August 31, 2016 at 5:13 pm

If the U.S. increases interests rates what effect would that have on the rest of the markets, outside the U.S.?
Surely, instead of acceptant negative returns more funds would move into the U.S.
How would this impact world finances and trade?

Marvin GoldmanWednesday, August 31, 2016 at 5:44 pm

So youal made that kind of money why didn’t you get me in from the beginning? What do you think about the stock market crash of 2016?? Can I speak to somebody on the phone.

J P FrogbottomWednesday, August 31, 2016 at 6:20 pm

Do you REALLY believe Yellen & Fed Co. are going to raise rates in Sept? Do you further believe in Santa Claus, how about the Easter Bunny? How about religion, can we throw a few icons in an eternal fire, too? Data driven crapola if I can extend an opinion. NO rate hikes this September, come back later for more extend, and pretend.

ScotWednesday, August 31, 2016 at 6:58 pm

I’m confused. If jobs are weak, can we assume that Europe is also weak? If the dollar declines, isn’t that going hurt exports in Europe and any other place whose currency rises against the dollar? Doesn’t this decrease confidence in EU banks and govt, sending more money into the safety of the dollar or undergroumd. I read the sale of home safes in Germany is going through the roof, already. Doesn’t this signal further deflation?

If jobs are strong and the dollar rises, won’t this make the dollar-based debts around the world imcrease? This would also send more foreign capital into the RELATIVE safety of the dollar, right? It is the rising dollar that will destroy the world economy, and it looks like there is no avoiding it. Where am I wrong?

LJWednesday, August 31, 2016 at 7:26 pm

Clinton’s commanding lead? It’s a dead heat now…

LenGThursday, September 1, 2016 at 12:05 pm

Thank You for expressing that. I agree.
in the end November will be the reading.

LanceThursday, September 1, 2016 at 1:45 pm

Shave off 5-10 % from the polls on Hillary’s “lead” , when we know the media is biased against Trump, polls have been proven to be rigged, and you may get the true numbers.

Ron MooreWednesday, August 31, 2016 at 10:48 pm

You sure Ms Clinton has a commanding lead?

GordonThursday, September 1, 2016 at 5:01 am

One has to really laugh and given themselves a reality check when looking at all these glowing government numbers. I am predicting the employment numbers will be 210,000 tomorrow not to hot and not to cold. Anybody that is swallowing all this Fed and government numbers BS has surely fallen off of the turnip truck. Here is a statistic from BC Canada close to the US and I am sure it mirrors the quality of life in the US. Where in heavens name are all these people buying new vehicles and rising number of new home sales and increased consumer confidence. Wake up folks its a big con game and your the mark.http://www.msn.com/en-ca/news/canada/half-a-million-families-going-hungry-in-bc-report-says/ar-AAilehP?li=AAggFp5

JamesThursday, September 1, 2016 at 6:54 am

Political motivations by the major donor country the United States in the late 1940s under the Marshall Plan was aimed at reconstructing the war torn economies of Western Europe as a means of containing the international spread of communism. The experience of other major we

LenGThursday, September 1, 2016 at 12:17 pm

The Empress parades without cloths. No it’s not the Tarot.
By now nearly everyone understands the financial icing richly lathered on the meager cake of true data. I agree it would be painful to raise rates but there is the loss of ‘face’ pain that will sooner or later manifest if they are not raised.
My guess is a small rate rise and another QE of veiled character to compensate. This is really getting interesting (no pun intended).

Christopher JonesThursday, September 1, 2016 at 6:55 pm

I’m confused. It was mentioned that if there is a rate hike there is a possibility of a weaker US dollar. It’s my understanding that the stronger the dollar gets the lower gold gets. The value of gold has been bouncing around and if the jobs report comes out strong gold should loss ground and the opposite like today. When the manufacturering report came out weak gold went up. So …..if there is a rate hike wouldn’t gold go lower? And if the dollar weaken wouldn’t gold go up. It’s a never ending battle. When I base my judgement on these expert reports and short gold plays it goes up and the same with my long position it go down.
Taking a huge hit and concluding not to read these professional reports any more and just get out of the market altogether.

With 112 trillion dollars in worldwide debt. What do you think a rate hike will do to interest payments. If the feds want to spin the world into a depression, they will then hike interest rates. The only power the Feds have now is destructive power.
JD

GordonSaturday, September 3, 2016 at 10:47 am

Sorry I was about 60,000 to high on my prediction. Yes Boris you can quote the confidence numbers till the cows come home. I am confident my neighbor is confident the world is full of confidence but there is just one small piece missing the money to back up all that confidence. I was born in 1938 and learned over the years to avoid debt like the plague today people embrace it worship it wallow in it and thanks to the Fed and their friendly neighborhood banker it is still playing out at the moment but wait the friendly neighborhood banker is suddenly not so friendly. Life has its limits like the very life inside my body. We are just pushing out the due date a little further. We the war babies fully understand the dangers of debt but debt is now viewed as a rite of passage. As all passages there is a door at the other end that is locked.

cliffSunday, September 4, 2016 at 7:36 pm

Yellen will find the highest-minded reasons to keep rates at the lowest levels. Certainly, she will not raise rates beyond a quarter percent if the employment gauge suddenly explodes. Why? Rising interest rates will bankrupt our government with burgeoning interest payments. This financial, economic system is a scourge upon our people and sound government.

Jim BrownTuesday, September 6, 2016 at 12:21 am

Yellen and her herd, love playing the manipulation game. They’ve been doing it for two years. They’re out of ammo and can only “TALK” the markets up and down. Remember last December, when the markets had a massive heart attack, with only a 25 basis point increase. An 11% nosedive and they came out with their “Dovish Speak!” Our economy is nowhere close to decent! GDP less than 1%! Not good! Inflation at 1.6! Not good!

Eight years and 4.5 Trillion by the Feds and still no inflation. Instead, we have deflation. We are actually in a depression! We are following in the footprints of Japan, who have been trying to create inflation for 28 years. They’ll never come out of their depression and have an amazing amount of debt! So do we…the good ole USofA! Too many baby boomers, that are not spending, just like Japan. It’s all about demographics, baby!